Sunday, March 11, 2007

Not exactly earth shattering news here, but the IRS estimates that the amount that the government is shortchanged every year is somewhere around $350 billion (roughly 12% of total receipts).

Surely, we're not out there purposely trying to deceive the government of their rightful share of our AGI (adjusted gross income for normal people), are we?

A recent issue of "The CPA Journal" (yes, yes, I know - clearly I have no life when I've succumbed to the mind-numbing pleasure of reading page after illuminating page of the CPA Journal) indicated that the bulk of this gap comes from two sources - Underreported small business and self-employment income ($155 billion) and underreported nonbusiness income ($57 billion).

I am of the opinion that most people do not knowingly "cheat" on their tax return, but that they might not realize all of the income streams in their life that may be taxable.

Here is my favorite example:

Mrs. X's new Kia Sophia is rear-ended by Mr. Y's new Infinity G35. The damage is minor but still reported by both parties to their insurance companies. Mr. Y was clearly at fault and after two estimates put the repair cost at $450, Mrs. X receives a check to repair her bumper. Upon further inspection of her bumper and after seeing a sick sale on Jimmy Choo's, Mrs. X decides that she can live with the scrape on her bumper and buys 2 new pairs of pumps w/the cash.

Does Mrs. X owe tax on the $450? Of course, she does - it wouldn't be a great example if she didn't incur a taxable event. Very few people would recognize this as a taxable event, but if you failed to repair your car, this check becomes taxable income (you can postpone the repairs for up to 2 yrs, but if the repairs are not done w/in 2 yrs the check would be income at that time).

********************************************************Thanks to everyone for the feedback on the gas article. I'm fairly convinced that traders are behind the recent price run. Traders will be distracted this week by the complex task of filling out their NCAA brackets so look for some easing in gas spot prices :)

Tuesday, March 06, 2007

I have been completely stumped by the recent 30cent jump in gas prices. Ten days ago I paid $2.09 for regular in NJ (there is typically a 25-30 cent spread between NY and NJ due to lower gas taxes in NJ). Yesterday regular unleaded hit $2.79 in Clayton.

Today, I heard that a major refinery is down for another 2 mths which is causing a dip into existing inventories. This explains some of the rise, but the pace of this increase is still surprising.

I have a suspicion that I can't confirm that the slow trading in other commodities (copper, oil, etc) has led some of the fast money traders to chase gasoline futures because the trend is up. By increasing the price for the gas, the wholesalers have to increase what they charge retailers, etc. I'm trying to get some volume data on gas contracts. I'll post the findings later.

Anyone have any other insights?

******************************************************************************Update: Here are some interesting data points: The NYMEX (basically the stock market for commodities like oil/gas/copper) set their all-time record for volume on 2/23 (roughly 2 wks ago). This record volume broke a record that had been set the previous week on 2/15. What does this mean? As I suspected more and more $$$ is chasing the commodity and that by itself is pushing the price of the underlying asset (gas in this case). We saw this play out in 2006 when oil was trading at $77 when the fundamentals said it should be trading at $60.

To my eye it looks like traders are chasing the quick buck b/c oil and other commodities have been underperforming. Traders are more easily distracted than a 4 yr old at Chuck E Cheese, so I would suspect that they'll move onto something else fairly soon. Unfortunately, that won't help you or I at the pump until they let the gas contract fall back to it's Jan levels, but at least we have a reason for the recent jump in prices at the pump.

There are some persistent myths that resurface across the networks when the markets get choppy. On a side note, this is one of my pet peeves - it is clear that most of the major financial outlets (CNBC, Bloomberg) are rooting for stocks to rise. When investors are making $$$ they are happier and they watch more CNBC, which equals higher ad rates and more $$$ for salaries of the hosts, but the blatant cheerleading is at least annoying and possibly dangerous for your financial health.

Here is one of my favorite myths that I've heard recently:

Earnings are STRONGThe bulk of the earnings strength that everyone is referring to comes from Oil, Commodities and Financial Companies (lots and lots of mergers). Oil prices have eased (hard to tell at the pump) but the bigger risk are the big financials - Lehman, Goldman, Merrill, etc. Their balance sheets are loaded with risky credits that could lead to some huge charges in the coming years.

Also, companies continue to buy back their stock at record rates. This is how the math works - company A earns $100 in year 1 or $1.00/share if they have 100 shares outstanding. If the company buys 50 shares back and earns $100 in year 2, earnings are unchanged, but b/c they now only have 50 shares outstanding they earned $2.00/share. The headline will read EARNINGS DOUBLE IN YEAR 2 FOR COMPANY A!!!! Clearly this is a simplified example but this has been a major driver in the STRONG EARNINGS story.

Again, job creation has been horrible in this recovery, earnings are not that strong, the housing debacle is about to cripple us, inflation is real and growing, and the fed has no room to cut interest rates.

Wednesday, February 28, 2007

So we're poised at the open to bounce a little after yesterday's sell-off, but let's look at the new info.

GDP was revised down from 3.5% to 2.2%. That's a huge cut and look for more cuts in 2007 forecasts after yesterday's durable goods number.

I don't foresee a global meltdown of equities, there is too much $$ chasing performance for that to happen. However, data like today's GDP # reflect what we are all seeing (well everyone outside of Watertown which is experiencing it's own little retail/fast food/housing boomlet) the economy is starting to real from the slowdown in housing.

I expect us to see a series of weak economic reports to cause the markets to leak 1%/mth from here until 2008 or 2009. The Fed has no bullets to resurrect the economy at a time when it's starting to show cracks. Bernanke will say all the right things today but the reality is that he is a man without any paddles on the Niagara River.

As far as the impact all this has on your portfolio, I won't be too worried until we get to Aug-Sept. If the markets are down 10%+ for the year at that point we will get a mad rush by fund managers to make their number for the year. That means increased speculation and increased risk. That's when I'll get nervous (and even more short!!!).

Tuesday, February 27, 2007

Well, nothing like a little 3% drop to get your blood flowing again. At times like this when the markets become a major news story it's your job as a skeptic to separate fact from fiction as it relates to today's drop.

Here's the spin I've heard today on the major news networks as to what caused today's whackage - It's China, it was the attempt on Cheney in Afghanistan, it was weak durable goods orders, it was the pending revision of GDP, it was the weak dollar, it's the pending subprime blow-up, it's Iran, it's oil.................

China played a role, the $ played a role, GDP played a role, the NYSE played a role and Lacrosse players from Yale played a role.

Here's my take on the day - We gap lower on weakness overseas because of a threatened change in China's markets. The game on the street in recent years has been to buy these opening dips at 10am and make your money back by noon. I suspect many hedge funds got caught playing that game today. By early afternoon when there was no bounce people started cleaning up their sheets b/c there is concern about Wed's GDP number (rightfully so - I think it could be down from 3.5% to 2.5% or lower). A technical glitch causes the market to go haywire at 3pm and some real panic sets in w/the markets down 400-545pts. Tomorrow should be weak at the open, but look for London to try to stabilize (we'll know more tomorrow am obviously).

I've said for some time that all of my concerns about our economy - oil, housing, weak lending practices, weak dollar, etc - won't matter until one day they suddenly matter. Today appeared to be that day.

The greatest concern I have is that our economy is slowing (see tomorrow's revised GDP, home sales, today's durables number) at a time when the Fed can't cut rates for fear of sparking inflation. This is the early stage of a perfect economic storm that is not going to have an Easy Al solutions.

Questions? Comments? Shoot me an email and I'll answer any to the best of my knowledge.

Links

BlogCatalog

Subscribe To

About Me

I grew up in La Fargeville before attending college in Manhattan and ultimately working on Wall Street for about 10 yrs. I left NYC/NJ in 2003 and relocated my family to the beautiful waterfront of Clayton, NY. I spend my days caring for my 2 daughters and dabbling in the markets.